Weekly market update

The Dow finished the week down 1.96%, the S&P 500 down 2.1%, the NASDAQ down 2.96% and the Russell 2000 down 2.52%. Pretty much all of April’s gains are gone and that didn’t take long.

The major averages experienced their worst week of 2019 last week as trade wars pop back on the radar. Actually, they take up the whole radar because right now, nothing else matters, not earnings nor good news on the economy—nothing.

Yes, my friends, it’s officially a trade war and it goes something like this:

If you pull the trigger, we’ll pull the trigger.

If you put the gun down, we’ll do the same—and we can talk.

And traders and investors hold out hope for a market rescue—because one Trump tweet can change everything. It is a tough market to trade or invest in when everything can change based on one tweet.

Last week, President Trump raised the ante by adding additional tariffs on Chinese imports and threatened to up an additional $325 billion. That sent stocks lower and China wasn’t to be outdone. This tweet came from a Chinese news agency this past Monday, “China may stop purchasing US agricultural products and energy, reduce Boeing orders and restrict US service trade with China. Many Chinese scholars are discussing the possibility of dumping US Treasuries and how to do it specifically.”

Here are 3 potential outcomes:

The deal gets done—the S&P 500 rallies toward 3,000, with transportation stocks, semiconductor stocks, the German DAX, Korea’s KOSPI index and global banks among those poised to benefit most.

Postponed deal—S&P 500 falls to 2,775, then rallies. Under this scenario, strategists advise selling exposure to a gauge of stock market volatility—the Chicago Board Options Exchange (CBOE) Volatility Index.

No deal—the Fed would be forced to cut interest rates (on the idea that a trade war would cause economic and market chaos) the S&P 500 falls to under 2,600, investors pull out of perceived riskier assets such as tech stocks, emerging-market debt and investment-grade corporate bonds.

So, back to the markets.

The S&P 500 has pulled back only 2.5% this year (not including Monday 5/13). The average year sees a pullback of 8.5% after the first 5 months of the year. This helps put into perspective how rare the start to 2019 has been.

Stocks are betting on a rebound in the global economy in coming quarters. If we get higher tariffs, which we did, and talks break down between the U.S. and China, you can kiss that hope for global economic rebound goodbye.

Wall Street ended Tuesday’s session deep in the red on the back of comments from U.S. officials confirming higher tariffs on Chinese goods later this week. President Trump tweeted Sunday the U.S. would hike tariffs on Chinese goods as soon as Friday, which sparked a global sell-off

Turning to earnings, over 90% of the S&P 500 have reported 1Q19 results. 75% beat earnings estimate on +5.62% growth. Not quite the negative print many were expecting. This is good news.

On the economy, we added 263,000 jobs in the latest jobs report. Average hourly earnings remained unchanged @ 3.2% YoY. The unemployment rate fell to 3.6% and the labor force participation rate fell to 62.8%. Remember how the initial jobs report for February was +20K? Those were dark days.

Over the next two weeks, we will not have earnings as a catalyst as we wrap up May. There is very little in the way of economic data to act as a catalyst. That’s okay, they wouldn’t matter anyway, as I said earlier, IT’s ALL ABOUT TRADE. So, stay tuned and we will keep you posted.

Todd Day, MBA
Portfolio Manager
Horizon Financial Services, LLC
May 15, 2019

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